Apparently the time has come......the WSJ has more or less called a housing bottom in Sacramento (with the unemployment wild card).
The reason for my proclamation....back when the bubble began to burst, and with only a couple blog posts to my name, the WSJ was all over Sacramento as the poster child for what is wrong with the housing market. I wrote a post, making a joke about how the WSJ will likely let us know when there are signs of life in the market.......which occurred today on page D1.
They also include the D.C area (Virginia suburbs), where we came from.
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That took guts. :) Actually, we may very well be at a bottom when you factor in financing costs, but prices could easily fall further. Also, reaching the bottom does not mean prices will rebound sharply from here. The post-bubble crash in the 90s resulted in a multi year period of low prices (1995-1999).
Yes, I expect a very weak local housing market for several years to come....bad loans, underwater homeowners, unemployment, and tighter lending standards will keep a lid on demand and price appreciation.
Interesting article with what appears to be a lot of very macro/30,000 foot level views of the Sacto area done by real estate analysts with some antidotal information by some real estate agents. A few points:
• Affordability. I would expect sale to increase as “afforablility” increases. However, the NAR’s affordability index is bubble related.
• Rental Parity. Amy Musial is referenced as an example of affordability with a $230k house being cheaper than a two bedroom apartment. Two bedrooms range between $800-$1200 per month (www.rent.com), average $1000. The PITI on $230k house is $1,400 (30yr, 5.4% fixed, 20% down). If they put down about $46k of their own money they are paying about 28% more than the apartment. Not directly comparable I know but I didn’t make the comparison.
• Economy. Love the caveat about unemployment. Here is a good link regarding the relationship between unemployment and housing:
http://www.doctorhousingbubble.com/the-elusive-california-housing-bottom-the-relationship-between-unemployment-and-housing-prices-market-conditions-point-to-a-2013-market-bottom/
"buying a house became 'a no-brainer'"
Just because rent-buy works out doesn't make buying a no-brainer. Maybe the WSJ will publish a followup on this no-brainer three years from now when the homeowners are underwater.
"Actually, we may very well be at a bottom when you factor in financing costs"
This could be true, but a lot of variability comes into play. Under many circumstances, a cheaper house at a higher rate wins out over a pricier house at a lower rate. Unless you're staying in the home for 20 or 30 years, having the lower starting principal is just too big of an advantage. Higher rates and lower prices are fine with me.
The WSJ had a piece earlier in the year on how Sac rental parity is starting to line up.
http://online.wsj.com/article/SB123552129423664663.html?mod=article-outset-box
Personally, I think rental parity is one of the best indicators of long term fundamentals. It was our primary consideration for purchasing our first home in the D.C. area back in 2002, and was also a big factor for jumping back into the market this year.
However when comparing PITI to rent...apples to apples means factoring in tax benefits of owning and the cost of renters insurance.
I'm struggling with this decision too. It seems like some areas have probably bottomed and for several none economic reasons my wife and I want to buy. We could buy in the Rocklin / Roseville region for what we pay in rent. But, that nagging fear of having the prices drop substantially further keeps me from wanting to commit to the idea. I wish I could get a better feel for how much the Alt-A reset wave is going to affect that area. It seems like there already is a massive amount of shorts in that area and wonder if the Alt-A resets will substantially push the prices lower or not.
Higher rates and lower prices are fine with me.
You can always refinance, but you can never renegotiate the price you paid.
Prices will track rates, but with a lag. Rates have been relatively stable for the past 3-4 months, so prices have had time to get in line, but if rates shot up tomorrow, you'd need to wait 6 months before the market responded.
Comparing apples to apples on housing in the same area could also include, HOAs, Mello Roos, Special Taxes and Levies, and Maintenance and Repair. My typical quick and dirty comparison does not include those, but when I am interested in a house I dig deeper and do a better analysis.
Yes, income tax savings from the interest is tax deductible but diminishes over time. Spending $100 bucks to save $25 in taxes can get tricky. Also, we cannot forget when you itemize you don’t get the standard deduction, which is $11,400 for married filing jointly in 2009. The interest deduction is often overstated by real estate agents and overestimated by buyers.
Another costs of owning are the lost down payment interest, which given the current CD rate is abysmal.
On the positive side there is also, forced savings, as a positive side of ownership if you take into account, future prices, transaction costs etc.
Houses that I take a serious look at I add 10% to the rental parity for good measure to account for the house being a move up property.
The decision to buy in a declining market was a bit easier for us. The proceeds from selling our D.C. home were used to pay off our student loans, and still gave us a big chunk for a downpayment.
Not having to scrimp and save diligently for our downpayment made it a bit easier to jump back in. Fiscially it was not necessarily the right time (we aren't at bottom in the burbs of Sac), but it was the right house, and our previous LL promptly went into default (so it was likely we would have had to move anyways).
The big wild cards are unemployement and interest rates.
CA has a budget now, but in 3 months or 6 months as revenues fall we will be right back in a cash shortfall.
And we are still losing over 500k jobs per month. Any bottom can't be stable in the face of so much lost income.
Interest rates are low, but how long can they stay low?
The lower end homes have been at a bottom for a while. I know a few people that have put in offers and been rejected cause there were so many other offers and the agents I see at open houses tell me the same thing. They put in offers and there may be 30 other offers competing.
But in the homes that are $300k-$500k there is less competition. Investors can't really rent those for positive cash flow, and the down payment is a lot higher.
Try putting aside the questions of "affordability" and rent/mortgage calculations, and other can-I-afford-the-payment head games.
Picture yourself with enough cash to buy a house outright. Is this really the moment you would choose to get in to local real estate, rejecting all other options for protecting/growing your capital?
Excellent question Giacomo.
The situation you describe totally removes all thoughts of leverage or potential walk aways.
That changes the game plan for many I am sure. For me, we are not at the point where I would do an all cash deal. We will definitely overshoot the long term price points, like in all other bubbles.
This "bottom" could be very long and wide.
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